Understanding AB Trusts

If you’re navigating the complex waters of estate planning, especially after the loss of a spouse, you might have encountered the term "AB Trust." This trust, which was a popular estate planning tool a few decades ago, can still impact families today.

What is an AB Trust?

An AB Trust is a type of trust used in estate planning for married couples that splits into two separate trusts upon the death of the first spouse: the "A Trust" (also known as the Survivor’s Trust) and the "B Trust" (the Marital Trust or Bypass Trust).

• A Trust (Survivor’s Trust): This trust contains the surviving spouse’s half of the estate and remains revocable.

• B Trust (Marital or Bypass Trust): This trust holds the deceased spouse’s half of the estate and becomes irrevocable upon their death.

Historical Use for Estate Tax Planning

AB Trusts were primarily designed to minimize estate taxes. Before permanent changes in the tax laws (in 2013), the federal estate tax exemption was much lower, and an AB Trust helped married couples utilize both spouses’ estate tax exemptions. By placing assets in the B Trust up to the exemption amount and the remainder in the A Trust, couples could effectively double the amount of their estate that would be exempt from federal estate taxes.

Modern Use for Remarriage Protection

Today, the estate tax exemption is much higher ($13.61 million per individual as of 2024), which means fewer estates are subject to federal estate tax. Consequently, AB Trusts are now more commonly used to protect the interests of the children from the first marriage if the surviving spouse remarries. The B Trust ensures that the deceased spouse’s assets ultimately go to their intended beneficiaries, rather than to a new spouse.

What Happens When an AB Trust is Not Administered?

When the first spouse passes away, it’s crucial to follow the provisions of the AB Trust. Failing to properly administer the trust can lead to several complications, including:

• Legal Disputes: Heirs and beneficiaries might dispute how the assets should be distributed.

• Tax Issues: Improper handling can result in unexpected tax liabilities.

• Loss of Control: The surviving spouse might not have access to the assets they need if the trust is not correctly divided.

Court Petitions to Eliminate the B Trust

In some cases, families find that maintaining the B Trust is more cumbersome than beneficial. This often happens when the primary reason for creating the AB Trust—estate tax minimization—is no longer relevant. To eliminate the B Trust, the surviving spouse or other interested parties can petition the court. The process involves:

1. Filing a Petition: A legal petition must be filed in probate court to terminate the B Trust.

2. Notification: All beneficiaries must be notified of the petition.

3. Court Hearing: A judge will review the case, considering the intent of the original trust and the current circumstances.

4. Court Order: If the judge agrees, a court order will be issued to dissolve the B Trust, allowing the assets to be consolidated into the A Trust.

Proactive Steps to Consider

• Review and Amend: Regularly reviewing and updating estate planning documents is crucial. Changes in laws and personal circumstances can render old provisions outdated or counterproductive.

• Professional Guidance: Working with an experienced estate planning attorney ensures that the trust is administered correctly and that any necessary court petitions are handled properly.

• Communication: Open communication with family members about the estate plan can help manage expectations and prevent disputes.

While AB Trusts may seem like relics from a past era of estate planning, they still play a significant role in protecting family assets and ensuring that the wishes of the deceased are honored. Proper administration and, when necessary, strategic amendments through court petitions, can help families navigate the complexities of these trusts. If you’re dealing with an AB Trust after the loss of a spouse, consult with an estate planning attorney to understand your options and responsibilities.

How to Know Your Estate Plan is Current

Not having an estate plan comes at a significant risk for every single person, regardless of wealth, age, or life circumstance. Everybody’s estate plan may look different. It’s important to be sure your estate plan is tailored to your circumstances. Having an estate plan that is not current–meaning, it does not reflect your current wishes or address your current life circumstance–is as detrimental as not having a plan at all. In some cases, having an estate plan that is not suited to your life can be worse than not having one at all. Just like our lives evolve with time, our estate plan must adjust from time to time to address our life circumstances.

Are your young children not so young anymore? Are you transitioning into another phase of your life, like retirement or an “empty nest”? Did your life take an unexpected twist? Or maybe you weren’t aware of some changes in the law of which you would like to take advantage. Here are four things to look for in an existing estate plan to help spot potential areas for revision.

Unnecessary AB Trust

An “AB Trust” is a living trust created by a married couple that “splits” into two or more separate trusts upon the death of one spouse. It was commonly used prior to 2013 for estate tax purposes. It is still commonly used for non-tax purposes, such as re-marriage protection or with blended families. Since estate tax exemption amounts have increased dramatically since 2013, and since we allow spouses to use both of their exemption amounts automatically (“portability”), the AB Trust is no longer commonly used for estate tax purposes. If you created your trust prior to 2013 and your combined estate is worth less than $10 million, then you may want to consider restating your trust to remove the AB Trust provisions.

Outdated distribution path or specific gifts–adult children

Gifts for small children may look a lot different than provisions for adult children. Perhaps parents of young children placed basic care and needs like shelter and education above all else, and made provisions in their trust to reflect that priority. When that young child is a married adult with their own children, those protective provisions may look silly. Similarly, if a young child has grown into an adult who makes questionable decisions–with money, with partners, with their use of their free time–perhaps it’s time to put in more protective provisions for that child. There are many options for providing for your loved ones.

Additionally, perhaps your adult children have become more distinctive as they got older. For example, maybe one of your children moved abroad and the other is staying nearby, perhaps taking some of their time and resources to care for you. Maybe it’s a good idea to discuss whether to leave your home to one child and not equally to both, as to provide for the child who is caring for you, and to not create property tax issues.

Outdated list of decisionmakers

This is by far the most common reason people revise their estate plan. An estate plan is, after all, more about people than things. Being sure the decisionmakers are a list of good, reliable choices is paramount to a comprehensive estate plan. Click here for a prior post discussing how to choose decisionmakers.

Upcoming transition–divorce, aging partner, health issues

Life is nothing but a series of transitions. Your estate plan should be revisited regularly to be sure it addresses the current transition and contemplates any upcoming changes, as well. Are you going through a divorce? Are you about to retire? Perhaps you or your spouse are facing health issues. These are all reasons to revisit your estate plan and plan for the worst while hoping for the best. After all, you didn’t create an estate plan simply to address one set of circumstances.

Use this opportunity to be proactive in shaping your estate plan. If you wait too long, your agency will vanish, and in its place may only be left regret. Speak to an estate planning attorney to explore your options.